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We have recently reaffirmed our long-term Neutral recommendation on First Horizon National Corp. (FHN - Analyst Report), following a detailed analysis of the company’s fundamentals in the perspective of the current operating environment.  

Increase in reserves for GSEs mortgage repurchases have resulted in First Horizon reporting a loss in the second-quarter of 2012, following five consecutive quarters of profit. The company reported a loss available to common shareholders of $124.8 million or $0.50 per share, in line with the Zacks Consensus Estimate.

In addition to the increased provisions for mortgage buybacks, the company made litigation-related accruals. Also, lower-than-expected revenue fell both sequentially and year over year.

Going forward, we believe that though the winding down of the non-strategic part of the loan portfolio bodes well, it will remain a drag on its earnings going forward. Shrinking revenue base and regulatory issues, tepid economic recovery along with a low interest rate environment serve as headwinds for the company’s results.

Moreover, mortgage repurchase issue has been a significant contributor to the company’s loss in the second quarter. Similar to First Horizon, PNC Financial Services Group Inc. (PNC - Analyst Report) witnessed increases in mortgage buyback demands in the second quarter of 2012 and beefed up its reserves for the rising demands.

First Horizon has adequately beefed up its reserves following the upheaval in repurchase demands from the GSEs. However, it still bears the risks associated with the private label exposure and we remain concerned.

Yet, First Horizon’s endeavor to lower its exposure to problem loans is impressive. It is also aiming at controlling costs and improving long-term profitability by focusing on augmenting its core Tennessee banking franchise, which would augur well going forward.

Management remains focused on enhancing productivity and now expects to achieve its annualized consolidated expense goal of approximately $1 billion by the end of 2012, a year ahead of its initial target.  This represents a 25-30% reduction from the 2010 level.  Going forward, we expect the measures to enhance operating efficiencies.

Also, from a capital perspective, First Horizon had sufficient capital as of June 30, 2012, to qualify as “well capitalized” under the regulatory capital requirements. Moreover, share buybacks boost investors’ confidence in the stock.

Hence, the risk reward profile for First Horizon seems balanced and we have therefore reiterated our Neutral recommendation on the stock.

Moreover, First Horizon currently retains its Zacks #3 Rank, which translates into a short-term “Hold” rating. One of its closest peers, Cardinal Financial Corp. (CFNL - Snapshot Report) has a Zacks #1 Rank, indicating a short-term “Strong Buy” rating.

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